What is Cost Segregation and How Can Self-Storage Owners Benefit?
If you replaced the roof, discarded old
doors, perhaps updated your HVAC
unit, this is the last chance to take
advantage of the Repair Regulations
which allow owners a tax deduction
for discarded items that are still
buried in the depreciation schedule.
What is Cost Segregation
and How Can Self-Storage
Owners Benefit?
By Don Little
Most self-storage owners are unaware
that the IRS gives you two options to
depreciate your commercial property.
Owners can choose to straight line
over 40 years or they can segregate
parts of their property into shorter tax
lives, thus depreciating it on a quicker
schedule. The latter option is called cost
segregation. Cost segregation building
studies typically generate between
$40,000 and $60,000 of additional cash
flow in the first five years of ownership.
As a self-storage owner, this means
you likely will receive an infusion of
cash flow from the tax savings in
the amount of 4% to 7% of the cost
of your facilities. The engineering
study accelerates the depreciation on
many of the non-structural building
components (i.e. flooring, cabinets/
millwork, parking lot, security systems)
and moves them from a standard 39year depreciation schedule to the much
faster 5, 7 and 15-year depreciation
schedules. All that additional write-off
translates into new cash flow that goes
right into the owner’s bank account.
The largest re-write of the
U.S. Tax Code since the 1980s
may work in your favor.
Take advantage of the new Tangible
Property Regulations (“TPR”), also
known as the “Repair Regulations”. The
Repair Regulations are complicated but
they offer significant economic benefits
to self-storage owners. In addition to
cost segregation, we have highlighted
additional tax benefits below.
Do not throw away your
deductions. What went
into the dumpster in the
past can now be written
off of your books.
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Even owners that have already filed
their taxes for 2014 can still amend
their return to take advantage of this
IRS “Use it or Lose it” opportunity
before the extension deadlines.
For some owners, this could be
a huge deduction to write off the
items now or continue to depreciate
them for the next 20-40 years.
Do you have a capitalization
policy in place that allows
you to write off purchases
of less than $500?
With the new TPRs, commercial real
estate owners are allowed to write
off items purchased up to $500 per
item on an invoice. To be eligible, you
need to have a capitalization policy
in place, make the correct election
on the annual return and include a
statement with the return. CSSI can
supply a sample copy of an acceptable
Capitalization Policy to be eligible.
Are you planning to do an
upgrade or an Improvement
to the building?
A qualified small business taxpayer
(less than $10M in assets or
gross receipts) can now write off
Improvement expenditures on the
building up to $10,000 or 2% of
the building basis on all buildings
less than $1M. It is an annual
election. CSSI will show you how.
If the building requires anticipated
repairs more than once every 10
years, a building owner may not have
to capitalize their next maintenance
event. Learn how to take advantage
of the new IRS “Routine Maintenance
Safe Harbor.” CSSI will show you how.
Increased record keeping?
To take advantage of these
deductions, expenses now need to
be tracked on a per building basis per
site. And taxpayers may be forced
SBOA Magazine - Fall 2015
to reassign a starting depreciation
basis to each building on a site.
It’s complicated. Get
back to simple.
Switching to a cost segregation
depreciation method will answer
these questions and help you take
advantage of the new regulations
instead of the new regulations
taking advantage of you.
Ask your tax professional about it,
but cut them a little slack because
these TPRs have given them a lot
more work. Most are not trained
construction engineers and are
unaware of all the non-structural
building components inside the walls
of your self-storage facilities. The IRS
prefers engaging an engineering firm
that has significant construction and
structural engineering knowledge of
your buildings and can identify the
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